Tax obligations of a sole trader in 2016

Have you embarked on the harrowing journey of doing business “on your own”? You probably believe in yourself and you probably excel at what you do. However, you may be less adept at administration and may not be familiar with the taxes you are expected to pay.

4 minutes of reading

This overview of tax and other self-employment obligations should help you focus on what you are really passionate about. We may also save you some costs.

A self-employed person is not an employee

If you are a classic employee, you don’t have to deal with tax issues. Your employer will do everything for you. But are you really an employee? Americans say, “It looks like a duck, it quacks like a duck, it walks like a duck – so it’ll be a duck after all!” That’s the way it should be in employment law when performing so-called dependent work. In practice, however, this may not be the case. What is important is the contract you have with your “employer”. If you are a freelancer, you have to look after the tax issues yourself.

Tax on what you earn

The Inland Revenue is particularly keen to grab the purse strings of your earnings. However, it’s rather passive; it’s only active if you don’t hand over the money yourself. Every self-employed person is obliged to submit a tax return to the relevant tax office by 1 April at the latest and pay the tax for the previous year, which they calculate themselves.

If you use a tax adviser, you can only file your tax return at the end of June.

however, the 15% tax is only calculated on the profit. So you can deduct your actual costs or apply a ‘flat rate’ instead. However, you can also take other allowances into account. For example, deductions for a spouse, life insurance, disability, etc.

U jakých příjmů Paušál Maximální výše
Příjmy z řemeslných živností, zemědělské výroby, lesního a vodního hospodářství. 80% 1 600 000 Kč za rok (uplatní se maximální odchylka 40 % nahoru)
Příjmy z živností volných, vázaných i koncesovaných 60 % 1 200 000 Kč za rok
Příjmů, na které nemáme živnost, například z jiného podnikání dle zvláštních předpisů (advokáti), z poskytnutí autorských či průmyslových práv (patentů) atp. či z jiné samostatné výdělečné činnosti 40 % 800 000 Kč za rok
Přijmy z pronájmu 30 % 600 000 Kč za rok

For example, imagine Mr. Viktor with an income of 600 thousand crowns per year. Mr. Viktor is a copywriter who works at home. His real expenses are therefore minimal and not worth claiming. He therefore applies a 60% flat rate. How much will he pay in tax for 2015?

Příjmy pana Viktora 600 000 Kč
Výdaje pana Viktora 360 000 Kč (uplatnil 60 % paušál)
Daňový základ 240 000 Kč
Sleva na poplatníka 24 840 Kč
Daň 11 180 Kč

Lawyer for business

We will provide you with an experienced lawyer for your business. Whether you need his help on a spur-of-the-moment basis, or even for a whole year, he will always be there for you. When you order, you only pay the price for the first month of service, and payment is made at monthly intervals thereafter.

Health and social insurance

In addition to the tax office, other institutions will be looking at you. For example, your health insurer is waiting anxiously to see if you have calculated your deposits correctly. You have to pay 13.5% of the assessment base for health insurance. The assessment base is exactly half the tax base (see above). However, health insurance must be paid on at least the minimum assessment base. This was CZK 159,666 for 2015.

Let’s illustrate this again with Mr. Viktor.

Mr. Victor’s income 600 000 CZK
Mr Viktor’s expenses 360 000 CZK (he applied a 60% flat rate)
Tax base 240 000 CZK
Assessment base cZK 159,666 (the minimum applies)
Health insurance 21 555 CZK

The minimum monthly deposit for 2016 is set at CZK 1,823 (in 2015 it was CZK 1,797). You do not have to pay the advance if you also have some employment income as a “side income”. However, it will still be added up at the end of the year.

Social security contributions are the most complicated, they depend on the previous year’s income and also on the nature of the income.

Value added tax

VAT is probably the most powerful tool the state has to provide an income. The principle of this tax is magical.

Let us illustrate it with an example. Mr Radovan buys goods from his supplier for CZK 1,150 – of which CZK 1,000 is the price of the goods and CZK 150 is VAT (15% at a reduced rate, for example on foodstuffs). Radovan then sells the goods to his customers for CZK 1,725. Of this, CZK 1,500 is the price of the goods and CZK 225 is the VAT. When calculating the tax, Radovan deducts the input VAT (CZK 150) from the output VAT (CZK 225) and pays the difference: CZK 75.

However, the normal VAT rate for sole traders is 21%.

Anyone can register for VAT, because sometimes the possibility of deductions is advantageous. However, it is compulsory for those whose turnover exceeds CZK 1,000,000 in 12 months.

It is necessary to register for VAT either monthly or quarterly, and now it is also necessary to submit a so-called control report, i.e. an overview of all invoices issued and received.

Road tax

To make matters worse, if you use your car for your business, you must also pay road tax on it. However, you only pay this for the months in which you actually use the car.

You have to file your return quarterly (by 15 April, then 15 July, etc.). The amount of tax is based on the performance of the car and its age (date of registration). Cars running on alternative fuel (e.g. electric, hybrid, gas) are exempt.

Other taxes

In addition to the above, there are other fees and local taxes. These include property tax, municipal waste tax, tax on the use of public spaces (e.g. festivals), etc.

Keep your head down and take it easy when paying your taxes. After all, the famous American judge Oliver Wendel Holmes said it beautifully: “I like to pay taxes, they buy me civilisation“.

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Lawyer for business

We will provide you with an experienced lawyer for your business. Whether you need his help on a spur-of-the-moment basis, or even for a whole year, he will always be there for you. When you order, you only pay the price for the first month of service, and payment is made at monthly intervals thereafter.

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Author of the article

JUDr. Ondřej Preuss, Ph.D.

Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.

Education
  • Law, Ph.D, Pf UK in Prague
  • Law, L’université Nancy-II, Nancy
  • Law, Master’s degree (Mgr.), Pf UK in Prague
  • International Territorial Studies (Bc.), FSV UK in Prague

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